Credit card issuers used credit controls imposed last spring to jack up prices and increase profits as much as to control the extension of credit, according to a congressional study.
In one fell swoop, the Federal Reserve Board wiped away state and federal restrictions that had stood between creditors and an array of steeper charges and handed creditors a bonanza, according to the House subcommittee on consumer affairs.
What the credit controls did, said the study, was leave it up to the creditors to choose the means of controlling credit. Their choices tended to have a more pronounced impact on increasing profits than in curbing credit, the study found.
"When credit controls were invoked in March, it gave those creditors an excuse to raise costs to the consumers while blaming the federal government for their actions," said subcommittee Chairman Frank Annunzio (D-Ill.). "Many creditors who now complain that they are suffering because consumers are not buying on credit have only themselves to blame," he said.
Higher charges "convinced many consumers to stop buying on credit, and once consumers found out that they could get by without credit purchases they have continued to stay on the buying sidelines," according to Annunzio.
On March 14, 1980, following an executive order by President Carter, the Federal Reserve Board put a special credit constraint program into effect. The credit control program was part of a broader anti-inflationary campaign launched by the Carter administration.
A major shortcoming in the program, acording to the study, was that "it left it completely up to creditors to determine what restrictive conditions they would impose on their customers, if any."
The device most favored by creditors surveyed by the subcommittee was imposing an annual fee -- in spite of the fact that whether a customer made new purchases or none, he could not avoid the fee. "Consequently, there does not appear to be any relationship between imposing an annual fee and the board's credit program goal of credit restraint," the study concluded.
The study covered changes made by 59 creditors, some of which issued more than one type of credit card, which raised the total number to 96.
Included in the study's findings are the assertion that "the Federal Reserve Board may have set up the credit program regulations in order to permit creditors to impose permanent, harsh new credit card terms on their customers." A spokesman for the Federal Reserve Board said that no one at the board had any comment on the study, which he had not seen.
According to the subcommittee report, credit controls allowed banks, oil companies, department stores and others to make changes that they had wanted to make for years, including charging annual fees for credit cards, requiring higher minimum payments and charging higher interest rates.
The credit restraint program did away with the fuss and bother of state regulations that required long periods for notice before credit card terms were changed and that prevented changes being applied retroactively. Instead it established one national standard for notice of credit card changes, said the study. "The new rule met each of the obstacles to changing credit card terms head-on and demolished them," said the study. It also allowed "unpopular credit card term changes [to be] draped by creditors in the American flag, as creditors did their 'patriotic duty.'"
The study asserted that such changes as applying new charges retroactively did little to curb the extension of credit. An effective control was to cease accepting credit card applications or to raise the standards for being granted credit. Of the creditors surveyed, 42 percent stopped taking new applications and 41 percent raised standards.
Still another change adopted by creditors was to change the manner in which finance charges are calculated. Like some of the other changes, this had slight impact on how much and how often consumers used credit, according to the study.
One area in which the study gave creditors fairly high marks was in presenting the changes in a reasonably clear manner.